Muni Market Sees Most Active Issuance Week Of 2014

By Michael Aneiro

Over $8 billion of new municipal debt came to market this week – and that’s not even counting the $3.5 billion of bonds sold by Puerto Rico on Tuesday. It made for the most active week of new muni issuance so far this year, and Morgan Stanley Wealth Management muni strategists John Dillon and Matthew Gastall say the market has held up well under the supply deluge, so much so that they “expect better entry points in the coming weeks”:

The initial reception of the non-Puerto Rico deals appears positive. While the timing of this supply was largely anticipated from a seasonal standpoint, the outsized calendar coincides with a volatile UST market following above-consensus US payroll data and arrives when municipal relative value resides near an annual low. The question at hand is whether the outsized week is a flash in the pan or the start of a more robust trend. A glance at the calendar also indicates the potential arrival of tax filing-related selling by investors….

Although we expect issuance during March through June to rise significantly off the paltry levels of January and February (the first and second lowest issuance months, on average, since 2000), our base case is one of lower overall issuance in 2014 by 8% to 12%. Once the challenging year-over-year comparison optics fade in May, more palatable issuance declines should come into focus and be generally price supportive while providing ample market liquidity and price discovery.